S&P 500 second half outlook and significance of long-term installment investment

Written by:  Mutsumi Kagawa (Chief Global Strategist, Economic Research Institute of Rakuten Securities)



1. Predict the S&P500 for the second half of the year.

In May, the debt ceiling issue that suppressed the US stocks was enacted with the approval of both houses of Congress and the president’s signature on the “Fiscal Responsibility Bill” compiled by President Biden and Speaker of the House McCarthy. A US Treasury default has been averted, and the S&P 500 Index hit a year-to-date high in June. So where will be the US stocks heading towards the second half of the year? Chart 1 illustrates the “main scenario”, “best scenario” and “risky scenario” of the S&P 500 that I envision towards the end of the year. The main scenario is aiming around 4600 points by the end of the year even though the stock prices fluctuate. It anticipates that the policy interest rate will peak out, the economy will reach a soft landing, and business performance will recover in 2024. In the best-case scenario, the Nasdaq’s dominance, known as the “AI rally”, pushes the market higher, and the S&P 500 continues to rise. On the other hand, the risky scenario envisions a hard landing (severe recession) or stagflation (simultaneous progression of recession and high inflation) in the second half of the year. I believe that the probability of the main scenario will be realized is more than 60%. In the main scenario, the S&P 500’s 100-day moving average, which marked a “golden cross” (confirming the market is turning upward) with the 200-day moving average in March is anticipating the medium-term trend to continue to recover towards the end of the year while absorbing occasional short-term corrections.



2. Recheck the long-term total returns for US stocks

In line with the US stocks scenario described above, what investment strategies seem to work when the stocks are facing a short-term correction? Chart 3 compares the performances of the total return indexes (including dividends) for the US stocks (S&P500 index), world stocks (MSCI World Stock Index) and Japan stocks (TOPIX) by setting the price at about 30 years ago (beginning of 1993) at 100. As you can see, the total return of US stocks (yen based) is dominant, rising to 19.4x over the past 30 years. The results of stock investment in the long run include an increase in stock price (capital gain) and a dividend (income gain). The stock market sometimes falls, but you can see that the “total return has increased more than 19x in 30 years” in the yen-converted US stocks (if you continue to invest carefully over the long term). This is a market performance that greatly exceeds the “10.7x that of world stocks (yen)” and “2.6x that of Japan stocks” during the same period. Looking back at these comparisons, the S&P 500 index seems to be worthy of being evaluated as the “world’s strongest stock index” in terms of long-term return considering risks (return fluctuations). Of course, it is difficult to say exactly what the total return will be in the future. However, assuming that the S&P 500 index will grow at an annual rate of about 10% starting from the current level (4,200 points), it is estimated that that it will possibly reach 5,000 points in the next two years. Based on a strategy to invest for long-term, I believe that “buying on decline” and “bargain hunt” are worthwhile when facing with several stock price corrections that are expected for the foreseeable future.



3. Reverify the long-term track record of instalment investment

As of the end of May last week, I would like to verify the market performance of the “effects of investing in US stocks (regular fixed-amount investment)” from a long-term perspective. Chart 3 simulates a case in which 30,000 yen was invested in US stocks (S&P 500 total return index/converted to yen) since the beginning of 1993, about 30 years ago, and then continuously invested 30,000 yen at the end of each month thereafter. The total amount invested is 10,980,000 yen (=30,000-yen x 366 times) on a book value basis when we have made 366 regular fixed amount (instalment) since the beginning of 1993. Due to the “dollar cost averaging” and the “compound interest” (snowball effect), the market value of the investment principal has grown to about 75.38 million yen (as of end of May 2023). This indicates that the market value has grown to approximately 6.87x the cumulative investment amount (cumulative investment principal). In the past 30 years, stock prices fell due to IT bubble (2000), bankruptcy of Lehman Brothers (2008), the Covid-19 pandemic (2020) and inflation shock (2022). Besides, there were occasional fluctuations in the dollar-yen exchange rate in the foreign exchange market. It is not uncommon for stock prices and exchange rates to fluctuate greatly while practicing long-term investment. But looking back over the long term, US stocks converted into yen greatly exceeded not only bank deposits but also fixed income securities and Japan stocks. The market performance has verified that the instalment investment is able to increase the assets. Even if stock prices and exchange rates decline as risks materialize at times, we can see that the results are absorbed by the long-term accumulation of each year’s rise. I would like to reaffirm the asset building effect of continuing to invest in US stocks on a regular basis and use this as a guideline for the future.




Name: Mutsumi Kagawa
Title: Chief Global Strategist
Organization: Rakuten Securities Economic Research Institute
Bio: Mutsumi Kagawa has an extensive background in the field of finance. In 1989, he began his career as a fund manager and investment researcher at various institutions, including Nikko Securities Investment Trust (Nikko Asset Management), Citibank, and Tokai Tokyo Research Center. With his experience working in the United States, Kagawa brings a global perspective that is highly regarded in his current role as the Chief Global Strategist at the Rakuten Securities Economic Research Institute.